IMF to Brussels: Hurry Up with Banking Union; Germany: Not Yet

“Investors’ faith in euro-area bank balance sheets must be restored … and banking union completed, otherwise, the euro area risks entering a lengthy, chronic phase of low growth and balance sheet strains” the IMF said in its Global Financial Stability Report on Wednesday.

The report, which comes out twice a year, points out that European banks should take stress tests and identify ahead of time who would fill any capital shortfalls, in order to provide more credibility.

Brussels was willing to do its homework. As European Union regulation commissioner Michel Barnier suggested to German newspaper Handelsblatt on Wednesday, the EC could act as that new banking resolution agency for a limited period of time, until the European Stability Mechanism (ESM) could take over.

The bailout fund, the European Stability Mechanism (ESM), could take over banking resolution as soon as it has become a European institution. But for that we would need to change the European Constitution,” he added.

That proposal is different from the one Germany’s Finance minister Wolfgang Schaeuble raised on Tuesday, that the planned banking resolution agency would only act with Europe’s largest systemically relevant banks, not the small entities.

The answer to Mr Barnier was quick: a German finance ministry spokesman said that plan would still pose legal problems.

“Barnier’s proposal does not clear up the legal concerns, nothing has changed in Germany’s position,” he said.

Now that the euro zone is leaving the worst of the crisis behind, with Spain, Italy, Portugal and even Greece eventually returning to growth next year, the baking union could be the missing piece on the recovery puzzle. Many in the EU hoped Berlin would soften its position after the elections, but nothing has changed so far.